Fiduciary Rule

George Michael Gerstein speaks to Fund Intelligence about the DOL’s new leadership

Speaking to Fund Intelligence, George Michael Gerstein expressed skepticism that Eugene Scalia, the next Secretary of Labor, would have to recuse himself from rulemaking the DOL is expected to soon announce related to its vacated 2016 Fiduciary Rule. Gerstein also spoke about what he expects from the DOL over the coming months.

A New Direction for DOL Fiduciary Rulemaking

Yesterday, the U.S. Senate confirmed Eugene Scalia to succeed Alex Acosta as the Secretary of Labor. Scalia was confirmed along party lines on a vote of 53-44. Last week, Scalia told lawmakers that he may have to recuse himself from the work involved in fiduciary rulemaking due to his involvement in litigation pertaining to the 2016 Fiduciary Rule. Scalia stated that he would seek guidance from the Department of Labor’s (DOL) designated agency ethics official with respect to his ability to participate in such work. However, if Scalia were to be required to recuse himself, political decisions regarding the final rule would likely fall to Patrick Pizzella, the deputy labor secretary who has been the acting head since Acosta stepped down earlier this year.

As early as this fall, we may see the DOL issue new guidance on rollovers (a significant and uncertain issue in the wake of the Fiduciary Rule’s demise) and, in all likelihood, a proposed class exemption applicable to broker-dealers, which, at its heart, could condition relief on adherence to new Regulation Best Interest. We do not anticipate the DOL to reformulate the ways in which one becomes an investment advice fiduciary under ERISA (i.e., expanding the ways in which one becomes a fiduciary).

Finally, we are keeping a close eye on new guidance from the DOL on proxy voting over the next few weeks. You may recall that the President issued an Executive Order in April that, in part, required the DOL to examine if new guidance in this area was necessary. The DOL could decline to issue new guidance, since Field Assistance Bulletin 2018-01 addressed proxy voting. We will provide an update as soon as any new guidance on these issues becomes available.

Why states have opted to “Go Your Own Way” on fiduciary standards re. broker-dealers and investment advisers

Over the past 2 years, the states have taken disparate approaches to filling what they perceive as a regulatory void when the DOL Fiduciary Rule was struck down by a federal court. At the outset, most states, with the exception of Nevada, took a disclosure-based approach (most notably, NY and NJ), and legislation was the preferred avenue. Now, the trend is toward heightening the standard of care (disclosure appears to be viewed skeptically) through regulation (executive/governor’s branch). Though it varies by state, there at times can be incongruity of approach taken within a state. For example, the New Jersey legislation favored disclosure, whereas Governor Murphy preferred a new standard of care. Though the New Jersey legislation is unlikely to be reintroduced next year, it highlights a risk for market participants when there is inconsistency intrastate and interstate. We are expecting to see draft bills over the coming months for the next session in a small handful of states, but will also keep a (very) close eye on if and when either or both of New Jersey and Massachusetts decide to move forward with their fiduciary duty regulations applicable to broker-dealers and investment advisers. Nevada is also likely to be moving forward with finalization on its proposed fiduciary implementing regulation.